1. CDAE 254 - Class 25 Nov. 27 Last class: 7. Profit maximization and supply 8. Perfectively competitive markets Quiz 7 (take-home) Today: 8. Perfectly competitive markets Class exercise Next class: 9. Policy analysis Important dates: Problem set 7: due Thursday, Dec. 6 Problems 7.1, 7.2., 7.3, 7.8, 8.1, 8.2., 8.3. and 8.4 (textbook) Final exam: 3:30-6:30pm, Tuesday, Dec. 11

2. 8. Perfect competitive markets 8.1. Basic concepts 8.2. Supply in the very short run 8.3. Short-run supply 8.4. Short-run price determination 8.5. Shifts in supply and demand curves 8.6. Long-run supply 8.7. Applications

3. 8.1. Basic concepts (1) An overview of an economy (2) Market structures -- Perfectly competitive market -- Monopoly -- Oligopoly (3) Supply response: The change in quantity of output in response to a change in demand conditions. (4) Very short run, short run, and long run

4. 8.2. Supply in the very short run (1) A graphical analysis (Fig. 8.1) (2) Market equilibrium (3) Impact of a shift in demand (4) Impact of trade, inventories, and government interventions

5. 8.3. Short-run supply (1) Short-run: The number of firm is fixed but the existing firms can change their output levels in response to changes in the market. (2) Supply curve: Relationship between market price and quantity supplied. (3) Short-run supply curve of an individual firm: SMC above the SAVC (Ch. 7). (4) Short-run supply curve in a market (Fig. 8.2) For example, there are only two firms in a market: q a = - 2 + 0.5P, q b = -6 + 1 P (5) Notations

6. 8.3. Short-run supply (6) Short-run elasticity of supply (a) Recall our general definition of elasticity Elasticity of Y with respect to X = (b) Short-run supply elasticity =

7. 8.3. Short-run supply (6) Short-run elasticity of supply (c) Estimation of supply elasticities: -- From two observations For example: the supply in the market increased from 100 to 120 units when the price increased from $2.0 to $2.6. What is the supply elasticity? -- From a supply function: For example: Q = -10 + 0.6P, what is the supply elasticity when P = 40?

8. 8.4. Short-run price determination (Fig. 8.3) (1) Supply and demand in a market (2) Market equilibrium (3) An example (4) Effect of an increase in market demand

9. 8.5. Shifts in supply and demand curves (1) A shift in supply curve and the importance of the slope of the demand curve (2) A shift in demand curve and the importance of the slope of the supply curve

10. Class Exercise Suppose a market has 100 identical producers and each producer has the following supply function: q = - 2 + 0.5 P (a) Graph the supply curve for one firm and then graph the supply curve for the market (b) Calculate the supply elasticity for the market when P=12 If the demand function for the market is Q = 1000 – 30 P, (c) Derive the market equilibrium P* and Q* (d) Calculate the demand and supply elasticities at the market equilibrium price and quantity

11. 8.6. Long run supply (1) Constant cost market (pp. 269-270) (2) Increasing cost market (pp. 272-273) (3) Decreasing cost market (pp. 275-276) (4) Examples